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What is the difference between the consumer price index (CPI) and the producer price index (PPI)?

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What is the difference between the consumer price index (CPI) and the producer price index (PPI)?
posted Jun 29, 2017 by Mukul Chag

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The consumer price index, or CPI, and the producer price index, or PPI, are economic indicators, and although both quantify price fluctuations for goods and services, they differ in the composition of their target sets of goods and services and in the types of prices collected for those different goods and services.

The PPI measures the average change in the sale prices for the entire domestic market of raw goods and services. These goods and services are bought by consumers from their primary producers, bought indirectly from retail sellers and purchased by producers themselves. The industries that compile the PPI include mining, manufacturing, agriculture, fishing, forestry, natural gas, electricity, construction, waste and scrap materials. As the PPI is meant to evaluate the output of U.S. producers, imports are excluded. The U.S. Bureau of Labor Statistics reports that 10,000 PPIs for individual products and groups of products are released every month.

In contrast, the target set of good and services evaluated in the CPI are expenditures of domestic and internationally imported consumer-related services for residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed and the retired, as well as urban wage earners and clerical workers. The CPI does not include rural or non-metropolitan areas, farm families, people in the armed forces and those in institutions, such as prisons and mental hospitals. The CPI measures food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services such as tobacco and smoking products, haircuts, funerals and other types of personal services.

The types of prices collected for the targeted goods and services of the PPI differ from those of the CPI. As the PPI evaluates the revenue received by its producer, it does not include sales and excise taxes in the price because it does not represent revenue to the producer. The CPI, however, does include sales and excise taxes because these factors affect the prices of the goods or services, which directly impacts the consumer as it increases or decreases the sale price.

Lastly, the CPI is one of the leading economic indicators of inflation as it calculates the change in cost on a bundle of consumer goods and services over time. A higher sale price indicates a decrease in consumer purchases and a rise in inflation, which eventually leads to adjustments in income and the cost of living. Conversely, the PPI serves as a leading indicator for the CPI so that when producers face input inflation, the increases in their production costs are passed on to the retailers and consumers. The PPI also serves as a true measure of output; it is not affected by consumer demand.

answer Jun 30, 2017 by Deepika Jain
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